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In the EU case involving global pharmaceutical company Boehringer Ingelheim, the European Court of Justice (ECJ) has set precedent on the long-debated matter of how rebates should be treated for VAT purposes when they are provided to parties not operating in the same distribution chain. Jan Sanders, who has been professionally analysing the matter for several years, discusses the impact of the ruling, which is significant for drug makers, health insurers and governments throughout the whole EU.

The ECJ ruling in case (C- 462/16) on Thursday 20 December
2017 is a victory for pharmaceutical companies, who will now be
allowed to calculate VAT when providing rebates to private
health insurers in the same way as when they do public health
insurers. The German tax authorities did not allow
pharmaceutical companies to do so, which created a huge
financial burden for the sector.

German system

In Germany, pharmacies issue pharmaceutical products to
persons with public health insurance pursuant to a framework
agreement concluded with the national association of public
health insurance funds. The pharmaceutical products are
supplied to the public health insurance funds, which make them
available to the persons insured. The pharmacies grant
discounts to public health insurance funds on the price
of the medicinal products. Pharmaceutical companies must then
reimburse pharmacies and wholesalers for this discount. For the
purposes of VAT, the German tax authorities treat the discount
as a reduction in remuneration.

Unlike public health insurance funds, private health
insurance funds are not themselves seen as the customer for the
medicinal products, but merely reimburse the persons they
insure for the costs incurred when they purchase pharmaceutical
products. Pharmaceutical companies are then bound, under
national legislation, to grant private health insurance funds a
discount on the price of medicinal products. So far, the German
tax authorities have refused to treat the discount as a
reduction in remuneration for the purposes of VAT. But
following the ECJ ruling the German approach will no longer be
allowed.

EU-wide impact

The relevance of the case is not limited to Germany. In
fact, over the past years all EU member states have been
struggling with this matter. As rising drug prices put an
ever-increasing pressure on health budgets, governments and
health insurers have introduced a variety of price control
measures. Many of these measures involve significant discount
structures which go beyond the traditional distribution chains
that the EU legislator had in mind when designing the VAT
system.

In the proceedings the UK had backed up the German tax
authorities, arguing that ECJ case law supports the argument
that if discounts are to be taken into consideration when
calculating VAT, the final consumer must be part of the
transactional chain. Like the German tax authorities, the UK
was of the view that because individuals are reimbursed for
discounts on sales to private health insurers, they cannot be
considered the final consumers.

Opinion AG

In July this year Advocate-General Evgeni Tanchev, published
his non-binding Opinion, in which he argued against
Germany’s application of the VAT rules. According
to the Tanchev, the reimbursements under the private health
system should in principle not be treated differently to the
national system for VAT purposes. This, he said, would avoid a
situation in which the tax authorities charge an amount that
exceeds the VAT paid by the pharmaceutical companies.

The ECJ has now followed the AG by taking an economic,
rather than a technical, approach. It ruled that the fact that
a private insurance fund is not the direct beneficiary of the
pharmaceutical products supplied by the pharmaceutical company
does not break the direct link between the supply of those
goods and the consideration received.

This article was written for International Tax
Review by Jan Sanders, an international VAT specialist who
works as an indirect tax manager at RELX.